Mortgage Guides

HELP TO BUY SCHEMES

The government has created the Help to Buy schemes including Help to Buy: Shared Ownership and Help to Buy: Equity Loan to help people gain their first step on the property ladder.  Please note that these schemes are only available to home-buyers in England.  Different schemes are in operation in Wales, Scotland and Northern Ireland. 

Mortgage deals may not be available and lending is subject to individual circumstances and status.

Help to Buy: Equity Loan

Equity loans are available to first time buyers as well as homeowners looking to move. The home you want to buy must be newly built with a price tag of up to £600,000 and, at the time that you purchase it, you cannot own any other property. Whilst participating in the scheme, you are not able to sublet your home or enter a part exchange deal on your old home.

With a Help to Buy: Equity Loan the Government lends you up to 20% of the cost of your newly built home, so you’ll only need a 5% cash deposit and a 75% mortgage to make up the rest. You won’t be charged loan fees on the 20% loan for the first five years of owning your home. For those living in London, the Government loan is up to 40% of the purchase price, also interest- free for the first five years.

Help to Buy: Shared Ownership

If you are unable to afford the mortgage to own your property outright, Help to Buy: Shared Ownership offers you the chance to buy a share of your home (between 25% and 75% of the home’s value) and pay rent on the remaining share. Later on, if you can afford to, you could purchase bigger shares.

With the scheme, you could either purchase a new build home, or a housing association re-sale home. In either case your shared ownership home will be held on a leasehold basis and you will either need to find your share by mortgage or through your savings. In England, the scheme is available to households with a combined income of under £80,000 (or £90,000 in London).

Your eligibility for one of the Help to Buy schemes is based on a number of criteria. Also, the scheme details and eligibility tend to change over time. Cotswold Mortgage Advice Centre can provide you with up-to-date information and also confirm whether you are eligibility to apply. 

 Lifetime ISA

Otherwise known as a LISA, a Lifetime ISA is a tax-efficient way of saving for your first home, or for your retirement. To open a plan you need to be aged between 18 and 39. You can save up to £4,000 a year and the Government will give you a 25% top-up on everything you save until the age of 50. This means that, if you open an account at 18 and contribute the maximum until you're 50, you'll have £32,000 from the Government. Once in your account it counts as your own money, too, which means you can earn interest on the bonus.

The money held in a LISA can be used at any time towards the purchase of a first home worth under £450,000, or for retirement, in which case you can withdraw it once you're 60. As it is designed specifically for one of these purposes, you'll be charged a penalty if you want to withdraw the funds for anything else.

AFFORDABILITY

In the past, mortgage lenders based the amount you could borrow mainly on a multiple of your income. This is known as the loan-to-income ratio. For example, if your annual income was £50,000, you might have been able to borrow three to five times this amount, giving you a mortgage of up to £250,000. 

Now, when you apply for a mortgage, the lender must also assess what level of monthly payments you can afford, after taking into account various personal and living expenses as well as your income. This is called an affordability assessment.

When working out how much you can afford to borrow, the lender will look at the difference between your income and outgoings. The income will include your basic salary plus additional payments from overtime, commission or bonus payments or a second job or freelance work. The lender will also include any other income that you have, for example from pensions or investments, child maintenance and financial support from ex-spouses. Outgoings will include payments on loans or credit agreements, credit card repayments, maintenance payments, insurance premiums and your regular household bills for water, gas, electricity, phone and broadband. The lender is also likely to ask for estimates of your living costs such as spending on clothes, basic recreation and childcare. 

As well as considering your current financial situation, the lender must also look ahead and ‘stress test’ your ability to repay the mortgage. This takes into account the effect of possible interest rate rises and possible changes to your lifestyle, such as redundancy, taking a career break or having a baby. If the lender thinks you won’t be able to afford your mortgage payments in these circumstances, they might limit how much you can borrow.

JOINT TENANTS & TENANTS IN COMMON

There are many reasons why you might want a joint mortgage. You might be in a relationship and wanting to share the property with your partner, or you might want to share the cost and financial investment with someone else. Sharing a deposit could also mean benefitting from a better mortgage deal, as a result of requiring a lower loan to value percentage.

As joint owners, each person is the legal owner of the property. The property can't be sold without everyone’s agreement and none of the joint owners can be forced to leave without a court order.

There are two types of joint ownership: 'tenants in common' and 'joint tenancy'. It is important to decide what type of legal ownership structure is best for you as there are important differences between the two. 

Joint tenancy

The majority of couples choose to purchase their home as Joint Tenants. Under this arrangement each has equal rights to the whole property under one shared mortgage. If one of you dies, your part of the property automatically passes to the other owner. You can't leave part of the property to someone else in a will.

Tenants in common

Tenants in Common are better suited to groups of friends and family, or where there are more than two buyers. This is because ownership of the property is split between the buyers depending on their investment. For instance, two buyers could own 25% of the property each, while a third buyer owns 50%. Importantly, each owner can leave their share of the property to whoever they choose in a will when they die.

COMMON MORTGAGE APPLICATION MISTAKES

Credit ratings

A poor credit score is likely to affect your mortgage application, with lenders either offering you a more expensive deal, or rejecting your application entirely. So it is important that you check your credit rating early on so that, if your score is low, you can try to do something about it in advance of applying for your new home loan. As well as being affected by obvious things such as late or missed payments on bills or loan agreements, your credit score can also be affected by other factors, including new credit card applications. The combination of a new credit application and application for a mortgage is, for many mortgage lenders, likely to set alarm bells ringing.

You can dispute your credit rating if you feel it is due to something that is not your fault, but it is best to wait until the dispute is resolved before making your mortgage application as an open credit report dispute is often a warning sign to lenders, and they may not proceed with your application. 

Misleading the lender

As lenders go to some lengths to verify the information disclosed in mortgage applications, they sometimes find discrepancies. On many occasions, these are due to an error or oversight in completing the necessary paperwork. But in some cases they are due to potential borrowers withholding or misrepresenting key items of information. One consequence of this could be ending up with a mortgage that is unaffordably high; of perhaps greater importance is that this action constitutes what is called opportunistic mortgage fraud, a form of money laundering offence with significant penalties.

Underestimating total costs

A common error, especially amongst first time buyers, is failing to consider all of the likely costs associated with owning a new home. The Money Advice Service has produced a helpful guide to moving costs, available at www.moneyadviceservice.org.uk/en/articles/planning-for-the-cost-of-moving-day.  Please note that by clicking this link, you will leave the regulated site of Cotswold Mortgage Advice Centre Ltd.  Neither Cotswold Mortgage Advice Centre Ltd nor TenetLime Network can be responsible for any content posted by a third party within a non-regulated site.

Applying for a lot of mortgages

Each time you apply for a mortgage, loan, or credit card, it leaves a sort of footprint in your credit history. Too many and it will be seen as a red flag to lenders. If you’ve already applied for several mortgages and have been unsuccessful, it would be wise to find a broker who can help you with your application. Any more applications that don’t address the reasons for your being declined could lead to long-term trouble. 

Big purchases before completion

Often buyers meet all of the requirements to qualify for their chosen mortgage deal but, before the house purchase is completed, they make major purchases for the new home using either credit cards or a loan.

Lenders are likely to re-check a mortgage applicant’s credit status just prior to the loan commencing. So these purchases could raise concerns, especially if they affect the affordability of the planned mortgage repayments. It is therefore advisable to delay making major purchases until after moving into the new home.

Not using a broker

A mortgage broker’s success relies on finding the most appropriate home loan for their clients and ensuring that they avoid each of the pitfalls mentioned above. At Cotswold Mortgage Advice Centre, we can help guide you through the entire mortgage process and, in doing so, save you valuable time and money.

MORTGAGE APPLICATION SUPPORTING DOCUMENTATION

When applying for a mortgage, your lender will want to see proof of your identity, address and financial situation. The information which you need to provide will depend on whether you are an employee or self-employed.

Employees

There are several things you need to provide in order to ensure a successful and smooth application. These are:

• Proof of address
• Passport
• Three months of payslips
• Your P60 from the previous tax year
• Three to six months of bank statements
• Evidence of any other sources of income
• Details on any credit cards or loans 

Self-Employed

The standard requirement from a lender is to see two or three years’ proof of income, although a few may accept as little as one year in certain circumstances. You will be assessed on profits and lenders may want proof that you'll earn similar sums in the years ahead by asking about your business and what contracts or clients you have lined up. To evidence your profits you will need to obtain your HMRC Tax Calculations, (sometimes referred to as a SA302) and Tax Year Overviews for the relevant years. There is a simple way of getting these directly from your HMRC online Self-Assessment account (accessed through online.hmrc.gov.uk).

For the self-employed and business owners it is often advantageous to obtain your mortgage from one of the smaller, local building societies. They generally pride themselves on their ability to assess individual applications on a case-by-case basis, rather than using the same broad criteria as many mainstream lenders. 

GUARANTOR MORTGAGES

Guarantor mortgages are a good way to help a young person if they are having trouble taking out a mortgage on their own terms. If they have a poor credit rating or are self-employed, it is unlikely that a lender will be prepared to offer them a mortgage.

Guarantor mortgages are more likely to be approved by a lender because the guarantor is essentially promising to meet the repayments in the case of the home buyer being unable to. The guarantor needs to maintain this commitment until the loan to value ratio reaches an agreed point, typically around 80%, before being released from the agreement.

A guarantor loan will generally still require a deposit, although the level required does vary. Whilst it is possible to get a guarantor mortgage without a deposit, this is likely to entail the guarantor using their own property as security.